Essent Group Ltd. Reports Fourth Quarter and Full Year 2017 Results

February 09, 2018 06:30 AM Eastern Standard Time

HAMILTON, Bermuda--(BUSINESS WIRE)--Essent Group Ltd. (NYSE: ESNT) today reported net income for the quarter
ended December 31, 2017 of $162.6 million or $1.65 per diluted share,
which includes an $85.1 million income tax benefit, or $0.86 per diluted
share, reflecting the one-time impact of the reduced U.S. corporate
income tax rate on the company's net deferred tax liability position.
Net income for the full year 2017 was $379.7 million or $3.99 per
diluted share.

“2017 was another successful year for the Essent franchise as we
continued building a high credit quality and profitable mortgage
insurance portfolio,” said Mark Casale, Chairman and Chief Executive
Officer. “During the year, we continued growing our earnings and
generating strong returns. As we head into our ninth year of writing
mortgage insurance, our outlook for 2018 on our business and housing
remains positive.”

Financial Highlights:

Insurance in force as of December 31, 2017 was $110.5 billion,
compared to $103.9 billion as of September 30, 2017 and $83.3 billion
as of December 31, 2016.

Flow new insurance written for the fourth quarter was $11.2 billion,
compared to $13.2 billion in the third quarter of 2017 and $10.5
billion in the fourth quarter of 2016. For the full year 2017, flow
new insurance written was $43.9 billion, compared to $34.9 billion for
2016.

Net premiums earned for the fourth quarter were $148.0 million,
compared to $137.9 million in the third quarter of 2017 and $116.8
million in the fourth quarter of 2016. For the full year 2017, net
premiums earned were $530.1 million, compared to $422.7 million for
2016.

The expense ratio for the fourth quarter was 24.7%, compared to 26.8%
in the third quarter of 2017 and 29.8% in the fourth quarter of 2016.
For the full year 2017, the expense ratio was 27.5%, compared to 30.9%
for 2016.

The provision for losses and LAE for the fourth quarter was $17.5
million, compared to $4.3 million in the third quarter of 2017 and
$3.9 million in the fourth quarter of 2016. For the full year 2017,
the provision for losses and LAE was $27.2 million, compared to $15.5
million for 2016.

Loans in default at December 31, 2017 were 4,783 compared to 2,153 as
of September 30, 2017 and 1,757 as of December 31, 2016. Total loans
in default increased by 2,630 in the quarter, including 2,288 defaults
that we have identified as related to Hurricanes Harvey and Irma. The
percentage of loans in default as of December 31, 2017 was 0.96%,
compared to 0.46% as of September 30, 2017 and 0.47% as of
December 31, 2016.

The combined ratio for the fourth quarter was 36.4%, compared to 30.0%
in the third quarter of 2017 and 33.1% in the fourth quarter of 2016.

The consolidated balance of cash and investments at December 31, 2017
was $2.3 billion, including cash and investment balances at Essent
Group Ltd. of $104.2 million.

The combined risk-to-capital ratio of the U.S. mortgage insurance
business, which includes statutory capital for both Essent Guaranty,
Inc. and Essent Guaranty of PA, Inc., was 14.2:1 as of December 31,
2017.

Essent Reinsurance Ltd. reinsured a total of $201 million of risk in
GSE risk share transactions in 2017 compared to $260 million in 2016.

A replay of the webcast will be available on the Essent website
approximately two hours after the live broadcast ends for a period of
one year. A replay of the conference call will be available
approximately two hours after the call ends for a period of two weeks,
using the following dial-in numbers and passcode: 855-859-2056 inside
the U.S., or 404-537-3406 for international callers, passcode 5475697.

This press release may include “forward-looking statements” which are
subject to known and unknown risks and uncertainties, many of which may
be beyond our control. Forward-looking statements generally can be
identified by the use of forward-looking terminology such as "may,"
"will," “should,” “expect,” "plan," "anticipate," "believe," “estimate,”
“predict,” or "potential" or the negative thereof or variations thereon
or similar terminology. Actual events, results and outcomes may differ
materially from our expectations due to a variety of known and unknown
risks, uncertainties and other factors. Although it is not possible to
identify all of these risks and factors, they include, among others, the
following: changes in or to Fannie Mae and Freddie Mac (the “GSEs”),
whether through Federal legislation, restructurings or a shift in
business practices; failure to continue to meet the mortgage insurer
eligibility requirements of the GSEs; competition for customers; lenders
or investors seeking alternatives to private mortgage insurance; an
increase in the number of loans insured through Federal government
mortgage insurance programs, including those offered by the Federal
Housing Administration; decline in new insurance written and franchise
value due to loss of a significant customer; decline in the volume of
low down payment mortgage originations; the definition of "Qualified
Mortgage" reducing the size of the mortgage origination market or
creating incentives to use government mortgage insurance programs; the
definition of "Qualified Residential Mortgage" reducing the number of
low down payment loans or lenders and investors seeking alternatives to
private mortgage insurance; the implementation of the Basel III Capital
Accord discouraging the use of private mortgage insurance; a decrease in
the length of time that insurance policies are in force; uncertainty of
loss reserve estimates; deteriorating economic conditions; our non-U.S.
operations becoming subject to U.S. Federal income taxation; becoming
considered a passive foreign investment company for U.S. Federal income
tax purposes; and other risks and factors described in Part I, Item 1A
“Risk Factors” of our Annual Report on Form 10-K for the year ended
December 31, 2016 filed with the Securities and Exchange Commission on
February 16, 2017. Any forward-looking information presented herein is
made only as of the date of this press release, and we do not undertake
any obligation to update or revise any forward-looking information to
reflect changes in assumptions, the occurrence of unanticipated events,
or otherwise.

Non-GAAP Financial Measures

In presenting Essent Group Ltd.’s results, management has included
financial measures, including adjusted book value per share, that are
not calculated under standards or rules that comprise accounting
principles generally accepted in the United States (“GAAP”). Such
measures are referred to as “non-GAAP measures.” These non-GAAP measures
may be defined or calculated differently by other companies. Management
believes these measures allow for a more complete understanding of the
underlying business. These measures are used to monitor our results and
should not be viewed as a substitute for those determined in accordance
with GAAP. Reconciliations of such measures to the most comparable GAAP
figures are included in the attached financial supplement in accordance
with Regulation G.

About the Company

Essent Group Ltd. (NYSE: ESNT) is a Bermuda-based holding company
(collectively with its subsidiaries, “Essent”) which, through its
wholly-owned subsidiary Essent Guaranty, Inc., offers private mortgage
insurance for single-family mortgage loans in the United States. Essent
provides private capital to mitigate mortgage credit risk, allowing
lenders to make additional mortgage financing available to prospective
homeowners. Headquartered in Radnor, Pennsylvania, Essent Guaranty, Inc.
is licensed to write mortgage insurance in all 50 states and the
District of Columbia, and is approved by Fannie Mae and Freddie Mac.
Essent also offers mortgage-related insurance, reinsurance and advisory
services through its Bermuda-based subsidiary, Essent Reinsurance Ltd.
Additional information regarding Essent may be found at www.essentgroup.com
and www.essent.us.

(1) In 2016, other revenues included the change in the fair
value of insurance and certain reinsurance policies issued by Essent
Reinsurance Ltd. ("Essent Re") in connection with Freddie Mac's
Agency Credit Insurance Structure ("ACIS") program that were
accounted for as derivatives under GAAP. In the three months ended
September 30, 2016, these contracts were amended and are now
accounted for as insurance contracts. The change in fair values of
these policies was $2,012, ($755) and $677 in the three months ended
September 30, 2016, June 30, 2016 and March 31, 2016, respectively.

(2) Income tax expense for the quarter ended March 31, 2017
was reduced by $3,023 of excess tax benefits associated with the
vesting of common shares and common share units during the quarter.
Prior to January 1, 2017, excess tax benefits were recognized in
additional paid-in-capital.

(3) Income tax expense for the quarter ended December 31,
2017 was reduced by $85,091 of income tax benefit due to the
one-time impact of the reduced U.S. corporate income tax rate on the
company's net deferred tax liability position.

(4) Loss ratio is calculated by dividing the provision for
losses and LAE by net premiums earned.

(5) Expense ratio is calculated by dividing other
underwriting and operating expenses by net premiums earned.

Exhibit C, continued

Essent Group Ltd. and Subsidiaries

Supplemental Information

Historical Quarterly Data

2017

2016

Other Data, continued:

December 31

September 30

June 30

March 31

December 31

September 30

June 30

March 31

($ in thousands)

U.S. Mortgage Insurance Portfolio

Flow:

New insurance written

$

11,234,855

$

13,221,038

$

11,368,276

$

8,034,153

$

10,475,258

$

10,299,161

$

8,715,171

$

5,366,675

New risk written

2,737,008

3,228,603

2,786,501

1,929,832

2,498,831

2,536,734

2,167,333

1,340,588

Bulk:

New insurance written

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

93,054

New risk written

—

—

—

—

—

—

—

8,480

Total:

Average premium rate (6)

0.53

%

0.53

%

0.53

%

0.53

%

0.56

%

0.58

%

0.57

%

0.56

%

New insurance written

$

11,234,855

$

13,221,038

$

11,368,276

$

8,034,153

$

10,475,258

$

10,299,161

$

8,715,171

$

5,459,729

New risk written

$

2,737,008

$

3,228,603

$

2,786,501

$

1,929,832

$

2,498,831

$

2,536,734

$

2,167,333

$

1,349,068

Insurance in force (end of period)

$

110,461,950

$

103,936,307

$

95,494,390

$

87,993,227

$

83,265,522

$

77,614,373

$

72,267,099

$

67,716,741

Risk in force (end of period)

$

27,443,985

$

25,807,358

$

23,665,045

$

21,801,667

$

20,627,317

$

19,289,387

$

17,937,364

$

16,745,819

Policies in force

496,477

467,483

430,585

397,650

375,898

350,600

328,441

308,779

Weighted average coverage (7)

24.8

%

24.8

%

24.8

%

24.8

%

24.8

%

24.9

%

24.8

%

24.7

%

Annual persistency

83.9

%

82.1

%

80.1

%

78.2

%

77.7

%

79.4

%

81.0

%

81.0

%

Loans in default (count)

4,783

2,153

1,776

1,777

1,757

1,453

1,174

1,060

Percentage of loans in default

0.96

%

0.46

%

0.41

%

0.45

%

0.47

%

0.41

%

0.36

%

0.34

%

Other Risk in Force

GSE Risk Share (8)

$

538,944

$

501,485

$

479,762

$

436,991

$

384,103

$

302,211

$

305,357

$

188,766

Credit Facility

Borrowings outstanding

$

250,000

$

175,000

$

175,000

$

125,000

$

100,000

$

50,000

$

—

N/A

Undrawn committed capacity

$

125,000

$

200,000

$

200,000

$

75,000

$

100,000

$

150,000

$

200,000

N/A

Weighted average interest rate

3.49

%

(6) Average premium rate is calculated by dividing net
premiums earned for the U.S. mortgage insurance portfolio by average
insurance in force for the period.

(7) Weighted average coverage is calculated by dividing end
of period risk in force by insurance in force.

(1) Based on ratings issued by Moody's, if available. S&P or
Fitch rating utilized if Moody's not available.

Investment Portfolio by Duration and Book Yield

Effective Duration

December 31, 2017

December 31, 2016

($ in thousands)

Fair Value

Percent

Fair Value

Percent

< 1 Year

$

628,958

27.3

%

$

329,901

20.4

%

1 to < 2 Years

164,856

7.2

153,184

9.5

2 to < 3 Years

280,177

12.2

156,620

9.7

3 to < 4 Years

263,799

11.4

176,896

11.0

4 to < 5 Years

263,273

11.4

139,115

8.6

5 or more Years

704,002

30.5

659,386

40.8

Total Investments

$

2,305,065

100.0

%

$

1,615,102

100.0

%

Pre-tax investment income yield:

Three months ended December 31, 2017

2.23

%

Year ended December 31, 2017

2.22

%

Net cash and investments at holding company, Essent Group Ltd.:

($ in thousands)

As of December 31, 2017

$

104,167

As of December 31, 2016

$

46,561

Exhibit K

Essent Group Ltd. and Subsidiaries

Supplemental Information

Insurance Company Capital

December 31, 2017

December 31, 2016

($ in thousands)

U.S. Mortgage Insurance Subsidiaries:

Combined statutory capital (1)

$

1,528,869

$

1,144,279

Combined net risk in force (2)

$

21,637,409

$

16,801,992

Risk-to-capital ratios: (3)

Essent Guaranty, Inc.

14.7:1

15.3:1

Essent Guaranty of PA, Inc.

5.4:1

6.8:1

Combined (4)

14.2:1

14.7:1

Essent Reinsurance Ltd.:

Stockholder's equity (GAAP basis)

$

662,819

$

401,273

Net risk in force (2)

$

6,299,437

$

4,181,737

(1) Combined statutory capital equals the sum of statutory
capital of Essent Guaranty, Inc. plus Essent Guaranty of PA, Inc.,
after eliminating the impact of intercompany transactions. Statutory
capital is computed based on accounting practices prescribed or
permitted by the Pennsylvania Insurance Department and the National
Association of Insurance Commissioners Accounting Practices and
Procedures Manual.

(2) Net risk in force represents total risk in force, net of
reinsurance ceded and net of exposures on policies for which loss
reserves have been established.

(3) The risk-to-capital ratio is calculated as the ratio of
net risk in force to statutory capital.

(4) The combined risk-to-capital ratio equals the sum of the
net risk in force of Essent Guaranty, Inc. and Essent Guaranty of
PA, Inc. divided by the combined statutory capital.

We believe that long-term growth in Adjusted Book Value per Share
is an important measure of our financial performance and is a
measure used to determine vesting on certain restricted stock
granted to senior management under the Company’s long-term
incentive plan. Adjusted Book Value per Share is a financial
measure that is not calculated under standards or rules that
comprise accounting principles generally accepted in the United
States (GAAP) and is referred to as a non-GAAP measure. Adjusted
Book Value per Share may be defined or calculated differently by
other companies. Adjusted Book Value per Share is one measure used
to monitor our results and should not be viewed as a substitute
for those measures determined in accordance with GAAP.

Adjusted Book Value per Share is calculated by dividing Adjusted
Book Value by Common Shares and Share Units Outstanding. Adjusted
Book Value is defined as consolidated stockholders’ equity of the
Company, excluding accumulated other comprehensive income (loss)
plus the proceeds, if any, from the assumed exercise of all
"in-the-money" options, warrants and similar instruments. Common
Shares and Share Units Outstanding is defined as total common
shares outstanding plus all equity instruments (including
restricted share units) issued to management and the Board of
Directors and any "in-the-money" options, warrants and similar
instruments. Accumulated other comprehensive income (loss)
includes unrealized gains and losses that arise from changes in
the market value of the Company’s investments that are classified
as available for sale. The Company does not view these unrealized
gains and losses to be indicative of our fundamental operating
performance. As of December 31, 2017 and December 31, 2016, the
Company does not have any options, warrants and similar
instruments outstanding.

The following table sets forth the reconciliation of Adjusted Book
Value to the most comparable GAAP amount as of December 31, 2017
and December 31, 2016 in accordance with Regulation G: